Pact with Japan can help trade, investments while China disputes are set aside for growth

India wants to play a role in the economic integration of Asia through closer ties with East Asian powers including China — despite a long history of political hostility — and Japan, journalists and experts from India said at a recent symposium in Tokyo.

An economic partnership agreement with Japan that recently took effect is hoped to boost bilateral trade and investment ties that have so far remained well below the potential, they said.

The veteran journalists and experts from India were taking part in the symposium organized Sept. 15 by the Keizai Koho Center under the theme, “Japan-India relations in a new era of the Asia-Pacific region.” Yasukuni Enoki, a former Japanese ambassador to India, served as moderator of discussions.

As India’s economy has expanded four to five times since it started liberalization efforts two decades ago, its trade and investment relations with East Asia have grown sharply, noted Rajeev Anantaram, senior associate editor of the Business Standard daily.

Today the world’s ninth largest economy, India has had an average annual gross domestic product (GDP) growth of 7 percent since 2000, and its performance after the global financial crisis following the 2008 failure of U.S. investment bank Lehman Brothers shows that the nation has become resilient to external shocks, he said.

As it continued to pursue liberalization programs, India concluded a series of free trade agreements with East Asian economies. Even economic ties with China, with which India has long had political tensions over border conflicts, “have expanded rapidly over the last 10 years . . . as the two governments decided that economic synergies should not be allowed to suffer” because of the disputes, Anantaram said.

Today, China is India’s second largest trading partner, while India is China’s 10th largest. While capital equipment such as machinery account for nearly 70 percent of Chinese exports to India, primary products such as iron ore and low value-added products comprise a large portion of Indian exports to China, he noted.

Chinese investments in India are also increasing, with major automakers and wind power equipment manufacturers showing interest in light of growing consumer needs and power demand in India, he pointed out.

Trade relations with Japan, meanwhile, have been sluggish as India “has been off (Japan’s) radar or below the radar” for a long while, Anantaram noted. Japan is India’s 14th largest trading partner, with the volume of bilateral trade at around $10.3 billion — compared with $230 billion between Japan and China, he said.

Tokyo and New Delhi have concluded the bilateral Comprehensive Economic Partnership Agreement (CEPA), which took effect in August. Under the accord, India will remove its tariffs on 94 percent of goods and Japan on 90 percent of goods over the next 10 years, and the two governments have set a target of increasing the bilateral trade volume to $25 billion by 2014. Anantaram said he hopes the accord will be “a fillip that helps jump-start the economic relationship, which is way below potential.”

India has so far been “largely excluded from Japan’s regional production networks” in Asia due to geographical and other reasons, he pointed out.

He noted that the volume of Japanese companies’ investments in India is also far below their investments in China, although the gap is not as wide as seen in trade statistics. However, what really counts is the quality of the Japanese investments, he said.

“If the nature of Japanese investments in India changes, even modestly, from being horizontal — which means market-seeking — to vertical or export-oriented, where part or all of the production system are moved to India to be reexported to Japan or to a third country,” then it would benefit both countries, Anantaram said.

Japanese automakers Suzuki and Nissan have been expanding their production in India, “and we’d like to see more vertical foreign direct investments replacing horizontal FDIs,” he said.

Rajaram Panda, a senior fellow at the Institute for Defense Studies and Analysis in New Delhi, also expressed hope that the CEPA will put Japan-India economic ties into higher gear.

The number of Japanese firms entering the Indian market has already grown in recent years, from about 200 in 2006 to 800, “but the figure is still very small compared with the number of Japanese firms in China,” Panda said.

Human exchanges — a key component of closer bilateral ties — remain limited to certain sectors. India has had a growing presence in Japan’s information technology sector, with the number of Indian IT engineers having reached 15,000 prior to the March 11 Great East Japan Earthquake. About half of them left the country following the disasters, but many have reportedly come back since then, he said.

Still, the number of Indian students in Japan stands at just around 500 — compared with roughly 70,000 Chinese students in Japan, he noted. “Indian students in Japan are even outnumbered by those from Bangladesh and Nepal. Meanwhile, there are about 7,000 Indian students in China,” he said.

India has often been talked about as a counterbalance against fellow emerging Asian giant China — both in the economic and the regional political context. At the same time, when regional economic integration is discussed, India’s position is left in the air as the talks have long centered on East Asian countries.

Panda noted that while economic integration is market-driven, there are various impediments including political and security issues.

Along with the political issues that frequently crop up between Japan and China or South Korea, India’s disputes with China must be overcome as India aspires to play a role in regional integration, said Jayanta Roy Chowdhury, a senior editor of The Telegraph (India) newspaper.

With European and U.S. markets in turmoil, it makes sense for Asian countries including India to work toward regional economic integration, he said, adding that closer integration will help the region “insulate itself better from the economic problems of the West.”

Among the fast-growing nations in the region, India, which is forecast to grow more than 8 percent this year, “has a lot to offer as three-fourths of its GDP comes from domestic demand,” whereas China is more export-oriented — as are Japan, South Korea and ASEAN, Chowdhury said.

Since the 1990s, India has adopted a “Look East” policy of trying to “revive all trading and cultural links with East Asia” that had been neglected as the nation “depended on trade with the West for its very tiny share of global commerce,” he said.

East Asia was initially cool toward such efforts by India, which had troubled relations with China and much of ASEAN in the 1960s and ’70s, he said. That changed when India began to achieve rapid growth and that came to be recognized in comparison with China’s rapid rise, which was accompanied by Beijing’s increasingly assertive diplomacy on what it called issues of “core concerns,” he noted.

“A perception has gained ground that India’s rise to maturity will be benign, and as such, many in East Asia seem more likely now than before to balance their interaction with China and India,” he observed.

As a result, India “has become more acceptable as a partner in most of East Asia,” Chowdhury noted. India concluded a free trade agreement with ASEAN that took effect in January 2010. ASEAN is already India’s fourth largest trading partner after the European Union, the U.S. and China, he said.

Still, China remains the key to regional economic integration and “China has to accept us to join the East Asian community,” Chowdhury noted.

A joint communique issued by Indian Prime Minister Manmohan Singh and Chinese Premier Wen Jiabao in New Delhi in December 2010 suggests that the two nations “support the multilateral cooperation mechanism in Asia and view positively each other’s participation in regional and subregional cooperation processes,” Chowdhury said. China has also agreed to a broad-based cooperation with India within the framework of the East Asia Summit, and the two countries are engaging in high-level economic dialogue with the aim of increasing the volume of two-way trade to $100 billion by 2015, he added.

“Indian analysts believe that China, after decades of hostility over border disputes, has now decided to engage India for two reasons — its desire to have a ‘peaceful periphery’ and to engage a rising India for mutual economic benefit,” he said. “A third reason would also be to try to mute the influence of the U.S. in Asian affairs, especially since the U.S. has made it clear that it wants India to play a role beyond South Asia.”

But Chowdhury said it appears premature to say that China has fully accepted India as a partner in East Asia. While the Chinese government has not officially commented on India’s Look East policy, its state media seems to view that policy and India’s free trade accords with East Asian economies “as an attempt to encircle China,” he said.

China also wants the existing ASEAN plus three (China, South Korea and Japan) framework to be the basis for a regional free trade arrangement, while seemingly trying to keep out India, Australia and New Zealand — countries in the ASEAN plus six grouping — as “outsiders,” he noted.

In the end, the question lingers on whether East Asian economic integration — or an Asian economic integration — “will remain hostage to the rivalry between China, Japan and India,” Chowdhury said.

“All of the three powers have to work out ways of addressing each other’s sensitivities,” he said. “India needs to constructively address China’s doubts about its Look East policy while engaging it increasingly in commercial terms. At the same time, (it needs to) continue the deepening of bilateral relations with Japan, ASEAN and South Korea.”

Two other speakers discussed security in the Indian Ocean security and the implications of China’s growing naval presence. The Indian Ocean is the “world’s most important waterway with 50 percent of container traffic and 70 percent of crude oil being carried through it,” noted Vidhi Upadhyay, senior assistant director for defense and aerospace at the Federation of Indian Chambers of Commerce and Industry.

Just like other Asian economies, security in the Indian Ocean is vital for India, 75 percent of whose trade in value terms and 95 percent in volume terms moves by sea, she said. The share of maritime trade in India’s GDP has grown steadily from 16 percent in 1995 to 28 percent in 2005, and is projected to rise to 55 percent in 2020, she noted.

Since 2008, India’s Navy has been “at the forefront of anti-piracy operations in the Indian Ocean,” where 266 cases of piracy was reported in the first half of this year alone, Upadhyay said.

Japan and India signed a security cooperation agreement in 2008, and the Indian Navy and Japan’s Maritime Self-Defense Force have both taken part in the Exercise Malabar naval drills with the U.S., Singapore and Australian navies in 2007 and 2009, she noted, adding that further bilateral cooperation is needed on this front.

The pact with Japan is among over a dozen defense cooperation pacts that India concluded with East Asian nations over the past decade, said Prakash Nanda, editor-in-chief of the Uday India weekly and editor of the Geopolitics monthly.

“India needs to have a profile in this part of the world,.given the fact that India’s total volume with East Asian economies now exceeds that with the European Union or the U.S., while more than half of India’s trade goes through the Malacca and Singapore Straits,” Nanda said. “This economic reality drives India’s naval strategy.”

In the meantime, China’s growing naval muscle -modernization of its naval forces both in terms of technology and manpower — “is certainly not inspiring for the Asia-Pacific security environment,” he said. “Although China talks of peaceful settlement of disputes through bilateral and multilateral negotiations, China’s bellicosity over the past two years in both East and South China Seas have raised serious questions about its intentions,” he added.

India wants “good and enduring relations” with China, and as an emerging economic power and major consumer of energy, it favors a multilateral action to meet common challenges to regional maritime security, he noted.